facebookHi guys! As a young person, do you think I should invest in more volatile stocks? I saw another post recently saying that younger folks should invest in more risky stocks. Thanks!? - Seedly
Seedly logo
Seedly logo
 

Advertisement

David Lim

David Lim

Level 5

07 Jun 2019

Hi guys! As a young person, do you think I should invest in more volatile stocks? I saw another post recently saying that younger folks should invest in more risky stocks. Thanks!?

10

    Discussion (10)

    What are your thoughts?

    Hello,

    Volatility is a characteristic that statistician's can measure - it is nothing but the degree of movement of a stock's price. More volatile stocks have larger movement in their prices 'generally'.

    Typical stocks would be around 15% annual volatility. It means that based on past observations over a long period of time, it is observed that frequently, price of a particular stock could rise/drop by 15% in a year (this is a One standard deviation move in math-speak). It just reflects history, and doesn't mean that the price wont rise or fall by more than 15%.

    If you buy a stock today, and never check the price of the stock for another year, this volatility makes no difference to you. You will simply look at purchase price, and price at the moment and calculate the return.

    The trouble starts when you use volatility as a measurement of 'risk'. Most people do that, because there is no way to measure "risk of permanent loss" -which is the real risk everyone is worried about. So volatility is a convenient measure, but not an accurate one. We're basically saying "if a stock has high volatility, it can really zig zag - and if it goes down too much, the investor will get scared, and sell at a low price to recover atleast part of the investment". So - high volatility is mistakenly thought of as 'high risk' - but it serves the purpose of some investors and advisors.

    Back to your question - seeking higher 'risk' is the wrong way to think about higher return. Just because you sought higher risk stocks doesn't mean they will give you higher return - they could be volatile simply because of political reasons or due to currency fluctuations.

    You should evaluate good stocks/ETFs, and then assess if their volatility is acceptable to you. Think of two choices - you want to go from A to B, and there is either a meandering but safe road, or a roller-coaster to reach there. The roller-coaster might take you there faster, but you might fall sick on the way, or it might break down and you'll never reach there. The meandering but safe road also has a higher probability to get you there, but of course, doesn't guarantee it. You have to choose what you road you want to take based on your life situation and goals.

    Sometimes, people reach point B from both roads, but in investing, the one who took less risk for the same return is considered a better money manager. This is measured by comparing risk-adjusted return - also called Sharpe Ratio.

    Hope this helps.

    Reply

    Save

    Share

      View 2 replies

      I personally hold some investments in more risky stocks and as someone below 30, I think I am qualified to call myself young;)

      This is how I see it: At a younger age, individuals tend to have less financial obligations and commitments, and therefore we can afford to subject my investments to greater risk especially when you have a steady income flow monthly. Not everyone sits well with the same risk appetite and so ultimately it depends on the individual, but I would say general circumstances would support younger people holding more aggressive portfolios(conversely for how retirees hold safer passive portfolios- less incentive for larger risk appetite)

      Reply

      Save

      Share

        View 1 replies

        Younger people should invest in more risky stocks because they have lesser dependents/ reliance on t...

        Read 8 other comments with a Seedly account

        You will also enjoy exclusive benefits and get access to members only features.

        Continue with Facebook
        Sign in with Apple

        Sign up or login with an email here

        Write your thoughts